Figure 3 illustrates this procedure by showing the cumulative distribution of real expenditures for one of the ten household categories, Rural 1. The officially
calculated level of poverty incidence for this household is 39.815 and the poverty line which replicates this level of poverty incidence, using the Susenas data, is shown in
the diagram. In the simulations, the real values of these poverty lines are held constant, using household-specific consumer price indices, based on household-
specific budget shares. Poverty incidence at the ‘rural’, ‘urban’ and ‘total’ levels is calculated by aggregating poverty incidence at these 10 household category levels,
using their respective population shares as weights see Table 3. This produces an estimate of the base level of poverty incidence at the national level of 23.1 per cent.
The incidence in rural areas 29.1 is two and a half times that in urban areas 12.
Inequality is calculated for the rural, urban and total populations by constructing a Lorenz curve separately for each, as shown in Figure 4, and then using a
spreadsheet calculation to estimate the Gini coefficient for each. Figure 4 reveals that inequality is higher in urban than rural areas and higher than for the general
population.
3. The Simulations
The shock The data base of the model was calibrated to reflect a 25 per cent tariff on rice
imports, as was the case from 2000 to 2003. For analytical convenience it was assumed that there was a quantitative restriction in place in this base situation but that
the restriction was non-binding, with a magnitude of 102 per cent of the actual level of imports in this base situation the year 2000. The shock then applied to this base
solution was a 90 per cent reduction in the level of this quantitative restriction. This reduction makes the quota strongly binding and reduces the actual level of imports by
89.8 per cent. The reason that imports are not reduced to zero is that although the restriction is called a ‘ban’, some imports actually persist. The quota licences are
assumed to be owned by the household group Urban 3. The quota rent revenue obtained from this implicit tax is distributed in full to this household category,
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distributed among its 100 centile sub-categories in proportion to their household expenditures per capita.
The closure Since the real consumption expenditure of each household is chosen as the basis
for welfare measurement, and is the basis for the calculation of poverty incidence, the macroeconomic closure must be made compatible with both this measure and the
single-period horizon of the model. This is done by ensuring that the full economic effects of the shocks to be introduced are channeled into current-period household
consumption and do not leak into other directions, with real-world intertemporal welfare implications not captured by the welfare measure. The choice of
macroeconomic closure may thus be seen in part as a mechanism for minimizing inconsistencies between the use of a single-period model to analyze welfare results
and the multi-period reality that the model represents. To prevent intertemporal and other welfare leakages from occurring, the
simulations are conducted with balanced trade exogenous balance on current account. This ensures that the potential benefits from, say, reduced imports of
rice, do not flow to foreigners in the form of a current account surplus, or that increases in domestic consumption are not achieved at the expense of borrowing
from abroad, in the case of a current account deficit. For the same reason, real government spending and real investment demand for each good are each held
fixed exogenously. The government budget deficit is held fixed in nominal terms. This is achieved by endogenous across-the-board adjustments to personal income
tax rates so as to restore the base level of the budgetary deficit. The combined effect of these features of the closure is that the full effects of
changes in policy are channeled into household consumption and not into effects not captured within the single period focus of the model.
4. Results
